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On the theory of interest rate policy

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  • Heinz-Peter Spahn

    ()
    (UniversitŠt Hohenheim, Institut fŸr Volkswirtschaftslehre, Lehrstuhl fŸr Wirtschaftspolitik, Stuttgart (Germany))

Abstract

A new consensus in the theory of monetary policy has been reached pointing to the pivotal role of interest rates that are set in accordance with central banks' reaction functions. The decisive criterion of assessing the Taylor rule, inflation and monetary targeting is not the macrotheoretic foundation of these concepts. They serve as "languages" coordinating heterogeneous beliefs among policy makers and private agents, and should also allow rule-based discretionary policies when markets are in need of leadership. Contrary to the ECB dogma, the Fed is right to have an eye on the risks of inflation and unemployment.

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File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9951/9832
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Bibliographic Info

Article provided by Banca Nazionale del Lavoro in its journal Banca Nazionale del Lavoro Quarterly Review.

Volume (Year): 54 (2001)
Issue (Month): 219 ()
Pages: 355-380

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Handle: RePEc:psl:bnlqrr:2001:42

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Keywords: Interest Rates; Interest; Monetary Policy; Monetary; Policy;

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References

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  1. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
  2. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 1-32, Winter.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  4. Willem H. Buiter, 1999. "Alice in Euroland," LSE Research Online Documents on Economics 20226, London School of Economics and Political Science, LSE Library.
  5. Miguel Leon-Ledesma & Anthony P. Thirlwall, 2000. "Is the natural rate of growth exogenous?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 53(215), pages 433-445.
  6. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
  7. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  8. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," Harvard Institute of Economic Research Working Papers 1905, Harvard - Institute of Economic Research.
  9. Krugman, Paul, 1989. "The Case for Stabilizing Exchange Rates," Oxford Review of Economic Policy, Oxford University Press, vol. 5(3), pages 61-72, Autumn.
  10. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  11. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
  12. Olivier Jean Blanchard, 1991. "Wage Bargaining and Unemployment Persistence," NBER Working Papers 3664, National Bureau of Economic Research, Inc.
  13. Svensson, L.E.O., 1999. "Monetary Policy Issues for the Eurosystem," Papers 667, Stockholm - International Economic Studies.
  14. Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001. "Interest rates and inflation," Working Papers 609, Federal Reserve Bank of Minneapolis.
  15. Taylor, John B, 2000. "Alternative Views of the Monetary Transmission Mechanism: What Difference Do They Make for Monetary Policy?," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 60-73, Winter.
  16. Otmar Issing, 1999. "The Eurosystem: Transparent andAccountable or 'Willem in Euroland'," Journal of Common Market Studies, Wiley Blackwell, vol. 37(3), pages 503-519, 09.
  17. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
  18. Krugman, Paul, 2000. "How Complicated Does the Model Have to Be?," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 33-42, Winter.
  19. Caplin, Andrew & Leahy, John, 1996. "Monetary Policy as a Process of Search," American Economic Review, American Economic Association, vol. 86(4), pages 689-702, September.
  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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Cited by:
  1. Philip Arestis & Malcolm Sawyer, 2003. "Does the stock of money have any causal significance?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 56(225), pages 113-136.
  2. Doyle, Matthew, 2006. "On the Optimality of Delay in 'Monetary Policy As a Process of Search'," Staff General Research Papers 12503, Iowa State University, Department of Economics.

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